3.1.2 Business growth Flashcards
Why do businesses want to grow?
Firms usually grow to increase their profit, which can be achieved by:
- Increasing economies of scale
- Increasing market share and reducing competition
- Expanding into new markets
However, firms may also want to grow due to:
- Product diversification
- Status of running a large firm
- Easier access to finance
Circumstances encouraging business growth
- A gap in the market created by changing consumer tastes and technology.
- Finance - Business growth can be financed by a parent company (cross-subsidisation).
- If barriers of entry can be put in place by a firm. For example, if a firm can secure a patent quickly.
- If a firm was able to ‘make the first move’, then economies of scale create a barrier to entry.
Circumstances preventing business growth
- Poor management
- Lack of finances to meet demand
- Small market without the ability to reach economies of scale
- Nature of the business means that small, close customer
service is more effective – inability to ‘scale-up’ the business. - CMA may block a takeover or merger.
Organic growth (and an example)
Where a firm’s market share is increased by reinvesting profits, innovation, improving productivity and launching products into new markets.
For example, increasing output by building a larger factory, hiring more workers, and increasing the amount of raw materials used.
Advantages of organic growth
- The firm has control over exactly how this growth occurs.
- Can be financed by retained profits.
- Builds upon a business’ strengths.
- Allows the business to grow at a more sustainable rate.
- More likely to be able to monitor and avoid the principal-agent problem.
Disadvantages of organic growth
- Tends to be slow.
- Can be more expensive.
- Growth achieved may be dependent on the growth of the overall market.
- Harder to build market share if business is already a leader.
- Slow growth – cannot progress without retained profit or borrowing.
- Rivals may opt for M&As and grow more quickly … could even buy your firm!
Inorganic growth
Where a firm’s market share is increased as a result of takeovers and mergers.
Instead of trying to defeat rival firms, inorganic growth involves purchasing rivals. Although competition authorities (such as the CMA) can block mergers and acquisitions.
Takeover
When one firm buys another firm, which becomes part of the first firm.
Merger
When two firms unite to form a new company.
Advantages of inorganic growth
- Quicker than organic growth.
- Cheaper than organic growth.
- Easy way to gain experience and expertise in a new area of business.
Disadvantage of inorganic growth
Competition authorities (such as the CMA) can block mergers and acquisitions.
Horizontal integration
Mergers take place between companies at the same stage of the production chain.
Advantages of horizontal integration
- Larger market share
- Larger base of customers
- Increased revenue
- Reduced competition
- Increasing synergies
- Economies of scale
- Reduced production costs
Disadvantages of horizontal integration
- Reduced economic growth
- Regulatory scrutiny
Real-life examples of Horizontal Integration
- Disney purchased Pixar (both animation studios).
- Morrisons and Safeway in 2004 (both supermarkets).
- Nike and Umbro (both sports brands).
- Iberia and British Airways (both airlines).
- Orange and T-Mobile (both phone network providers).